How did Microsoft get to be a $1.2bn phone player? Hint: NOT Windows Phone

Bill Gates anticipated Android in 2004... and they're cashing in now

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Comment Patents, not the next Angry Birds or having the best camera, are helping Microsoft tidy up in smartphones.

The amount of money Microsoft made on smartphones grew in 2012, but this was largely thanks to Android rather than Windows Phone.

In its latest SEC filing, Microsoft said Windows Phone revenue increased by $1.2bn in the year to 30 June, 2013.

But that number included an increase in "patent licensing revenue" in addition to sales of Windows Phone licences.

How does this compare to last year? It's difficult to say, because Microsoft is not consistent in the numbers it breaks out - cherry-picking the best, burying the worst.

What we can say is that one year ago, the phone number was too small to be significant or not to be embarrassing. A year ago, Microsoft didn't even say how much it made off Windows Phone. Instead, it talked about growth in Xbox - Windows Phone and Xbox lived in the same business unit: Entertainment and Devices. This year, Xbox is down so the amount of money being made off Windows Phone has been rolled out separately.

As ever, a year on, Microsoft has not said how many units of Windows Phone have actually shipped. You're supposed to forget the quantity, just feel the width of the numbers.

However, several things are clear: Android is the market leader by a long way, according to IDC, with Samsung topping the pile. Windows Phone is on less than five-per-cent market share. Also, it's Nokia that's shipping the vast majority of Windows Phones: 79 per cent of that five-per cent share.

No wonder Microsoft has been working diligently to become a passenger riding the success of Android, by having those making and selling Android devices pay it a royalty.

Microsoft was reported in 2011 to have told Samsung to pay it $15 for each Android handset it makes, claiming Android exploits patents owned by Microsoft. Samsung reportedly thought $10 more reasonable, and while the figure was never revealed, it did sign up.

Some, here, have tried to work out what that means to the numbers released Monday. Their bottom line: Windows Phone made less than $400m in actual revenue, meaning the vast majority of money Microsoft attributed to its phones revenue is from Android licences.

Patents, it seems, are a better bet. Like interest payments on credit cards or subscriptions for online software delivered as service, they provide a guaranteed return if you can persuade the person paying to sign on the dotted line in the first place.

Just sign here...it won't hurt a bit

And Microsoft has certainly done plenty of persuasion since 2010, having gone from Android device maker to Android device maker "persuading" them to sign up. The contents of the negotiations are always secret but the results are always hailed by Microsoft as a victory with Microsoft granting the broad access to patents in its portfolio.

Those signing up are, indeed, a list of the mighty: to Samsung you can add Foxcon, Acer, LG, Barnes & Noble and others. These are the companies are the ones behind Microsoft's $1.2bn.

Licensing deals have become the left hook in the one-two punch of patent litigation that's plagued the handset business since the iPhone and the explosion of the smartphone.

Barely a week has gone by without somebody lobbing a suit at somebody over corners or pinch and zoom.

Microsoft's model has been less court action, more a quiet word in the ear, as the company's spent less time in the courts in its path to rounding up Android device makers.

The problem for Microsoft, though, is that patents looks like its best hope for making money in the smartphone business for some time to come.

Nokia vice president Bryan Biniak in an interview here has revealed what he thinks is the real reason Microsoft is not making more money from actual sales of Windows Phone, and why - by extension - it's the patents that are paying.

It's because Microsoft still acts like a computer software maker that's trying to catch up more nimble consumer OEMs, he says. And Nokia is trying to change that.

According to Biniak:

We are trying to evolve the cultural thinking [at Microsoft] to say "time is of the essence". Waiting until the end of your fiscal year when you need to close your targets, doesn't do us any good when I have phones to sell today.

He reckons Nokia has to reinforce the message for change at Microsoft, but that's been hard because Microsoft is putting more effort into Windows and Xbox than phone.

The problem has been lack of apps. According to Biniak: "You can't sell a phone without the apps, you just can't." He continues:

People rely on applications for their day-to-day life and if you don't have something which I use in my day-to-day life I'm not going to switch [operating systems] because I don't want to compromise the way I live my life just to switch to a phone."

It's not just about the hardware, it's about the tools that are on the hardware. You can't sell a phone without the apps, you just can't.

Comment

If you follow Joe Belfiore, the vice president and manager for Windows Phone Program Management responsible for the design and software product definition at Microsoft, you'll soon see the problem. He's often tweeting about how some app is now on Windows Phone or how an existing Windows Phone app has been improved.

But apps alone won't help Microsoft close the gap; adding features is inching up a steep hill when it should be leaping like a mountain goat, like Samsung did with Android.

Also, it sounds like - for all the bluster coming out of Microsoft - Microsoft's leaving the heavy lifting on Windows Phone to its partner, Nokia.

Further, I'd argue, the battle for apps is actually over. Apple and Google won the numbers game but while they have the millions in reality, it's just a handful of apps that customers really want and are eager to use. And Microsoft and Nokia might have the "best phone ever" with the Lumia 1020, but the golden rule of technology is "best has never won, good enough comes first".

No, Microsoft's best bet to winning this war is attrition: slow growth through small market gains and signing up carriers who populate the markets, allowing Samsung or Apple stumble as they inevitably must and then being there to catch customers who fall - unless somebody else like Mozilla with its Firefox OS — gets there first.

It's a long haul, but nobody said it was going to be easy. Until then, Microsoft's best bet for making money on smartphones will come from more sales of Android. It is, after all, the pay-off for a patent moneymaker that began cranking out the bucks under Bill Gates early last decade. ®